FC - Franklin Covey Q4: Latest Results Confirm Bullish Thesis

2023-11-14 15:08:20 ET

Summary

• Franklin Covey's Q4 and 2023 fiscal results show continued growth across multiple segments.
• The company has been reducing debt and generating positive free cash flow, allowing for share buybacks and returns to shareholders.
• The education segment has seen strong growth and has the potential for ongoing expansion with support from a large foundation.

Introduction

I previously covered Franklin Covey ( FC ), back in May, when I wrote an article explaining my bullish view on the stock. Since then, the shares have risen a modest 2% to $37.83, less than the 5% rise seen in the S&P 500 ( SPY ). This underperformance against the S&P comes despite the shares reaching a peak of $48.36 in early August.

In this article, I want to explore the recent quarterly numbers , which confirm continued strength for the company, and look more into the future outlook which could drive growth in the share price.

Q4 and 2023 Fiscal Results

On the 1 ^st of November, Franklin Covey announced its results for their Q4 concluding their 2023 fiscal year. The company's strategic focus on organizational performance improvement, coupled with its subscription-based model, has propelled it to new heights, delivering noteworthy growth across key metrics.

Overall sales continued to grow, rising to an impressive $280.5 million over the year, a solid 7% increase year-over-year with tough comparisons to the 17% growth witnessed in fiscal 2022.

Their flagship All Access Pass subscription and subscription services experienced growth of 9%, to $158.0 million, representing a majority of revenues. Although previous quarters of the year had seen subscription retentions fall, the fourth quarter saw retentions return to their highs of over 90%.

Due to the way in which subscription revenue is booked, it is important to look at deferred revenue which can provide details on future revenue expectations. Deferred revenue increased to $111.2 million at the end of August 2023 compared to $102.4 million a year earlier. This was driven by the growth in multi-year contracts, with 54% of the All Access Pass Contracts now being for at least 2 years compared to 45% a year ago. This growth in multi-year contracts and deferred revenue provides a solid base for future sales growth and displays customers' satisfaction with Franklin Covey’s products to commit to multi-year contracts.

Overall, adjusted EBITDA increased 17% to $48.1 million in fiscal 2023, compared to $42.2 million in fiscal 2022.

Balance Sheet and Capital Allocation

With rising interest rates, corporations that took on significant debts have seen rising servicing costs. Franklin Covey however has been paying back debt, with debt having reduced from $45.2 million in 2018 to $15.3 million at the end of the latest fiscal year. Despite a higher rate environment, this has resulted in interest expenses being only $0.5 million over the past year against $2.7 million in 2018.

This debt reduction has been driven by the company's consistently positive free cash flow which was $2.46 per share over the 2023 fiscal year. Excess cash flow which hasn’t been used for debt reduction or to fund operations has enabled returns to shareholders. This has been in the form of share buybacks, with 885,000 shares repurchased during fiscal 2024, a 5% reduction in share count over the year.

Education Segment Growth

One of the segments that saw strong growth in the 2023 fiscal year was the education segment where revenues rose 13.1% to $69.7 million. The standout achievement of adding 791 new Leader in Me schools in the United States and Canada positions the division for robust expansion. Strategic district focus has played a pivotal role, with the addition of 147 new districts, signaling an accelerated effort to comprehensively grow this business segment.

One reason for this growth and reason to believe it can continue in the future was stated by Steven Covey, the president of Franklin Covey Education, in the Q4 2023 Earnings Call:

"As I have shared before we have a partnership with large foundation that’s committed to sponsoring literally thousands of schools over the next decade to help Leader in Me get going in these schools and districts."

This commitment from a large foundation to fund Franklin Covey’s ‘Leader in Me’ programs position this segment for significant ongoing growth, especially as the foundation plans on sponsoring over the next decade.

Valuation

Franklin Covey generated adjusted EBITDA of $48.1 million in 2023 and is projected to generate $56.3 million in 2024, and $66 million in 2025, based on the guidance given by management in the Q4 earnings call . Given the company’s history of meeting guidance in the past, we take these figures for use in our valuation.

We value the company based on the EBITDA/EV ratio, which provides a metric that includes both equity and debt. In this calculation, we assign an EV/EBITDA multiple of 11, based on the median company in this sector trading at this multiple.

Assuming the share count falls by 3% per annum due to share buybacks, with cash and debt remaining constant at $38.2 million and $15.3 million respectively, the valuation is as follows:

This suggests a price of $60.81 a share at the end of the financial year 2025, in 21 months’ time (August 31 ^st , 2025). Considering the current share price of $37.83, this implies a total return of 60.7% for a CAGR of 31%.

Risks

I previously covered the three main risks for Franklin Covey in my previous article: growth of free content, customers making training content in-house, and macroeconomic woes. By far the biggest of these three over the next few years will be macroeconomic woes. Despite the economy being stronger than I expected in the second half of 2023, beneath the surface bankruptcies are rising and are set to reach their highest level since 2010. This means Franklin Covey has the potential to lose customers if they go bankrupt or rein in spending to weather the storm. Despite this risk, I remain confident that Franklin Covey will ride out a slowdown given its strong balance sheet but a fall in earnings could occur, resulting in a short-term decline in the share price.

Conclusion

Franklin Covey’s robust financials, driven by another solid year of results, confirm its continued strength. With a positive outlook and solid growth prospects across multiple segments, the business’s fundamentals look strong. I believe the shares remain overlooked by the market and have the potential for significant upside in the coming years and I continue to hold the shares.

For further details see: